So I finally put myself on a salary.
I’m back to the world where I get direct deposit every 2 weeks, and check stubs, and all that employed-person stuff.
It’s a little strange after 6+ years of self-employed status — when I just went to sign on a car, I slipped and said I was self-employed but had to do a 180 and tell them I was an employee (of my company, but they don’t need to know that)…which is part of the reason I did all this in the first place.
The world is built for employed people. It’s ridiculous, but financial institutions, landlords, pretty much everybody asks fewer questions if you wave a pay stub, any pay stub, in front of their face. I’m looking at buying a home as an indie pro, and while that’s apparently gotten quite a bit easier in the U.S. in recent years, the world still favors people who are signed off on by a company…so I’ll be that (the tax situation looks like it’ll work out better anyway…update, it DEFINITELY did).
It was an EXPERIENCE during a pandemic (my first accountant straight up vanished on me) but I want to talk to you about how I walked through it all.
First off, this is going to be pretty long, so let’s cover a few things up front.
- This post is about what I did personally. The general principles can be applied by any freelancer, but this is a personal decision.
- You can do something very similar without going through the formal incorporation process I did.
- I incorporated for tax reasons (U.S.), so even if it sounds intimidating don’t totally write the incorporation option off altogether. It might be worth it.
- If you’re thinking about doing this yourself, talk to an accountant. (Seriously.)
I’ll get into the details about incorporation and all that stuff, but here’s a BASIC basic breakdown of what I did to put myself in a good position to consider paying myself a salary.
I cleaned up my cash flow confidence.
This happened over time, but I got my cash flows level by focusing on how much work I’m able to book each month. I know people talk about savings, but this is probably the most important step, because
- Even without all the officialness below, you can simply commit to transferring a set amount of money to yourself each month, every other week, or whatever.
- It’s a practice that allows you to build a cushion AND address those “What if…?!?!” fears if that cushion goes away.
I set up boundaries.
So this one I do recommend for everybody and I’ve done it since basically day 1, but I got serious-serious about it a couple years back.
Don’t mix business and personal. Separate bank accounts. Separate credit cards. Separate emails. All that.
The reason this helped is that it put me in the right mindset, early.
I got help.
I found an accountant to…
- Advise me on the incorporation question (We talked this out before I paid anything. Most accountants want to make sure it’s worth their time before they set up a relationship with you.)
- Handle S-corp status (Not necessary, but I step I wanted to take…because tax savings)
- Help with state incorporation (This worried me more than federal.)
- Decide how much to pay myself. (This can get wonky from a tax planning perspective.)
I researched payroll.
I found a payroll vendor, which was a LOT easier and cheaper than I expected.
Before we get into any details, let’s talk about what it really means to commit to paying yourself for your production work as a freelancer.
How Employers Keep Your Checks Flowing
First off, employers aren’t doing anything magical to make sure their employees have regular checks coming in.
By the time a business commits to paying employees set wages, they’ve (usually…hopefully) done the work to make sure they have a viable revenue model and steady cash flows. (This is why I push niche refinement and value so much around here. They’re the foundation of solid freelance income.)
But sometimes things don’t work out. That’s when they take out loans to cover the expense of employment (which is probably more common than most people realize).
But there it is. Revenue model, cash flows, a backup plan…all things that are completely accessible to freelancers if we want to set up stable income for ourselves.
I took just about the most official way possible to get this done (starting a company and employing myself) but there are some foundational steps you can take to do the same without messing with your tax status. It all starts with treating your business as its own entity.
- A Separate Bank Account: Having a separate account will do wonders for getting your head in the right place. Ideally all invoice payments should be coming here and you should be paying business bills out of this account. Most banks make it pretty easy to set up a separate business account, but even if you don’t want to be formal about it, something as simple as just a second account that you only use for your business expenses works too. There are tons of options these days, so don’t overthink it. You just need a separate place for your freelance business money.
- A Business Credit Card: Not a requirement (so don’t stress if you don’t want or can’t get one), but anything that helps you keep your money separate is going to pay off in the long run. If you can get one, check it out (and ONLY use it for business expenses).
Something I wish I’d done earlier in using this set up (I had both an account and a card under my LLC pretty much from the jump) is commit to a salary amount and set up automatic transfers.
None of that would have impacted my tax rate or status, but it would’ve helped me clean up some habits early on.
My #1 Hurdle…Commitment. (And the tool that helped.)
For me, the scariest thing about committing to a salary was…well…the commitment.
It was a lot to formally say that I was going to promise to bring in thousands of dollars a month to cover the cost an employee, even if it was just me…but you know what? That was all in my head.
It was a confidence issue.
It was just a number and it was a number that I could manage. So that number is what I tackled first. I just needed to rethink my role in bringing in work.
BlackFreelance takes a role-based approached to freelancing and this is one of those areas where it really pays off. That’s because the mindset and skills it takes to commit to bringing in a certain amount of work are fundamentally different from what’s needed to do freelance production work like creating content, or editing podcasts, or creating commercial photography.
I basically only use this sheet to track my results as my own marketing department. But let me tell you that sheet has taught me some LESSONS…mostly in only counting work once it’s signed and payment is set up. (There’s nothing worse than having to go back and see a total drop from an earlier month.)
You might have a more sophisticated sales solution or you might use a scaled down version…regardless, committing to paying yourself gets a LOT easier when you know you can book significantly more than your check on a given month.
A quick note on that sales sheet…that only tracks what I book.
The work might be finished that month, or 3 months later. If a client calls me today to set up and make up a deposit for work that doesn’t start until 6 months later, I record it today. Scheduling and production are their own separate worlds.
I used to do things differently, but I found that that muddied my motivation and let me get too relaxed when I felt like I had a big project coming up.
Setting Sales Goals
Building my confidence has been a (relatively) slow process of setting monthly targets and increasing them over time.
I started with a goal that was enough to cover the salary I wanted and kept pushing from there. When I was confident and consistently booking about 150% of my expenses (salary, health insurance, business services, software, etc.) for a year straight, I started considering making things official.
One of the main benefits of that sheet is perspective. You can look back and see your growth objectively instead of getting tossed around by freelance emotions that might not align with reality.
The Magic Range
If you’ve been around here a while, you know I’m a big fan of using ranges when quoting prices. The same goes for what I challenge myself to book each month in sales.
At the bottom is what I need to cover expenses (salary, health and business insurance, PTO, business services, software, etc.). The top is an ideal or “dream” goal. This way, I knew that even on my worst month (when I took extra time off or wasn’t feeling well or a pandemic hit) my marketing strategy and practices would hold me up.
To this day, in any one month, I want to be able to make between my floor, and my ideal goal.
For comparison, My goal is basically 150-200% of my floor. If you think that sounds high or like something you couldn’t do…it’s not. I promise.
A Little More on Sales.
Here’s the thing about sales. It’s a skill.
I’m terrible at sales but learned how to drive business by working strategically, providing value, and being consistent. Spend some time focusing on your positioning (covered in the Strategy Workbook), pushing your highest-earning services, and raising your rates, and you’ll be on a path to hitting your own numbers.
We’re covering this in the Academy right now. It’s something you can invest in and get better at. This was hard for me to process but I learned a lot listening to people who weren’t strong at sales but basically had to learn after being forced into a business development job.
I’m a big believer that just about any freelancer, you included, can book what they need to keep their cash flowing…I think most of us can do a lot more than that — that is if we take sales seriously (and prioritize high-dollar services, but that’s a conversation for another day.)
How I Set Up My Salary…Incorporation!
Finally! Let’s get into the good stuff…
Let me say this again, that this is a really personal decision. First off, I’m U.S.-based, so I’m going to talk about this from a U.S. perspective, but I’m sure similar options are available elsewhere (if you have thoughts, drop them in the comments.)
Before I signed even one form, I did some digging.
As much as people get all hyped over LLCs and S-corps, it is NOT always worth it. You really can lose money playing with your tax status. Depending on your income, and especially where you live, you can actually do some financial damage by switching your taxation over.
But I had a feeling it could work for me, so I moved forward. Here are the reasons I decided to incorporate.
The pass-through might not be permanent .
Last time I checked the pass-through deduction (the one that’s lowered so many freelancers’ taxes) is set to expire in 2025 (correct me if I’m wrong). So while this step might be a little redundant now, nothing’s guaranteed under any administration, so I went ahead and got things going regardless.
I live in Florida.
Despite all the Florida jokes (which are so silly since it’s really just a small-scale U.S.A.), with no income tax and tons of corporate exclusions, it’s a great place to keep your taxes low.
I talked to my accountant (after interviewing 4 and being ghosted by another AFTER we’d gotten things rolling) and that made it an easy choice. Your mileage my vary. Some states offer similar benefits, but you really need to look at your corporate tax rates vs. personal vs. self-employed…and talk to an accountant.
Payroll wasn’t a big deal.
Let me tell you, I was REALLY nervous about running payroll.
It’s not something I’d ever done, but I dug around and found out there are a bunch of services that will do most of the work for you (calculating and posting tax payments included). I was worried about a scenario where I couldn’t make payroll (which hasn’t happened), but I talked to my service. If I can’t pay, then I just don’t run payroll.
But yeah…quite a few freelancers incorporate like this, especially on the consultant side. It just doesn’t get talked about a lot in public.
I basically started a corporation (from a tax perspective) and started paying myself as an employee. Most people do it for the tax benefits — depending on where you live, it allows you to pay yourself and handle your taxes just like any other employee does, but then funnel excess money to yourself as an owner, which is generally taxed at a lower rate. (If you ever hear about freelancers who are paying 15% tax rates or lower, this is likely what they’re doing.)
Here are the steps I went through once I made the decision.
Starting the Corporation
Can you do this yourself? Yes. But I’ll say, as someone who actually enjoyed her graduate accounting classes an has always done her own taxes, I still passed this off to an accountant.
For a few hundred, they got the paperwork and language together (a mess since I had to ask for retro approval after missing the deadline because of the ghost accountant) and got it sent over. I waited…and waited and eventually got a letter in the mail saying I’d been approved to be treated as a S-corp for the 2020 tax year.
On the state level, I had to fill out a few forms online, but that was all easy. (Again, this is in Florida. Other states can be a LOT more complicated.)
Setting up Payroll
I use Gusto (about $40 per month…old school players like ADP and Paychex offer similar services for indie pros).
It was a lot easier than I expected. I just had to enter the S-corp and bank account info, then do the usual new employee forms and boom. I’m an employee. Now I run payroll just for myself every couple of weeks with just a few clicks. It takes less than a minute.
As far as what I pay myself? I got a pretty wide range of advice from the accountants I interviewed, but I landed right around the average salary for a technical writer (so I don’t raise any red flags). BLS.gov is a decent place to start if you want to do your own research, but even sites like PayScale can give you perspective.
Overall, disappearing accountant aside, it wasn’t bad at all…but it’s getting even easier. Companies like Collective (formerly Hyke…not an endorsement) offer a lot of these services in a cute package at a flat monthly rate.
A couple of things worth noting: The S-corp deal doesn’t tend to make financial sense until you’ve cracked the $75K-$100K annual revenue mark. (There’s some, good, skill set-neutral advice on how that plays out on this episode of High Income Business Writing)
Also, now I file two sets of taxes…basically as myself on a W-2, and as a business (which I’m having my accountant handle.) I’m honestly not all that worried since it’s not like individual self-employed taxes are easy. Now I just have an accountant handling the business part, so my overall tax drama should be minimized.
Here’s some additional reading on the topic
LLC vs S Corp- Which is the best for freelancers? (Collective)
When is the best time to switch to an S Corp? (Collective)
How Things Are Going
I’m still waiting to see how taxes go this year, but things are good!
I was nervous about the money being deposited by the payroll company into my federal account (y’all know I’ve been doing it monthly myself on EFTPS.gov) and state accounts, but I just checked both and everything looks good.
Next year I’ll be looking for ways to optimize providing health insurance, retirement, etc. I’ll keep things updated here.
So that’s it! Any questions, comments, corrections…just drop them below!